You probably are aware of the growing high price tag for a college education and may be wondering how to save for your child’s college education. As with any savings or investment, the earlier you put money aside, the better. But any savings you can make is beneficial to your child’s education. We can show you some ways to go about a college saving strategy that is easy and will offset the cost when it comes time for your child to attend a college or university.
Pros and Cons of Saving for College
As a parent, you probably wish that your child will not accrue enormous amounts of debt just for attending college. You want to set them up for success and save for your child’s college education. Planning ahead and saving for college is a wise decision.
Certainly saving for college is beneficial to offset the cost for your child’s education. If you save now, when the time comes the cost of college will be less and there will be less need for student loans.
However, there is a negative to saving for college. If you are saving for your child’s college education and not saving for your own retirement, this is not favorable. Keep in mind that your child can take out a loan to pay for college but you cannot take out a loan to support you in your retirement. Prioritize your retirement savings and after that, you can save for your child.
Options to Put Money Away
Fortunately, there are many different options to choose from with the result of savings for college. You may opt to choose one option or a few.
- Open a High Yield Savings Account
- 529 college plans
- Coverdell Education Savings Plan
- Roth IRA
- Prepaid Tuition Plans
- UGMA or UTMA
- Treasury Bonds
High Yield Savings
While most people have a savings account, using this method to accumulate some monies for your child’s college is an option.
Pros: safe way to save
Cons: if your savings is sizeable, your child’s financial aid package may be less generous
A very common method to save for your child’s college education is a 529 plan. It allows you to make after-tax contributions into an account that you own, naming your child as beneficiary.Your money is invested in specific mutual funds or exchange-traded funds and any money made is not taxable while in your 529 account. And it remains tax-free as long as you use the money for your child’s college education and related expenses.
Pros: high contribution limits, ability to change beneficiaries, considered a parental asset
Cons: limited investment options
Coverdell Education Savings Plan
Also known as ESA, a Coverdell Education Savings Plan allows you to make after-tax contributions to the ESA, and any subsequent earnings and gains are tax-free as long as the money is used for qualifying educational purposes. Formerly known as education IRAs
Pros: vast options for investments, tax-free growth
Cons: limit to annual contributions, may not qualify if high-income
If you use a Roth IRA withdrawal for qualified education expenses, you will avoid the penalty. But it’s important to know you will still pay income tax on the earnings portion.
Pros: savings grow tax-free, investment is flexible and can be used for college or retirement
Cons: IRA contributions are limited, money withdrawn is counted as untaxed income
Prepaid Tuition Plans
A prepaid tuition plan is designed for parents who are sure that their child will attend an in-state public university. A prepaid tuition plan allows you to pay for your child’s tuition at a predetermined price ahead of time.
Pros: locks in tuition rate
Cons: funds invested may require you use at specific colleges, penalty on funds used for anything other than college tuition
UGMA or UTMA
UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) are types of custodial accounts. They allow you to transfer assets to your children under age 18 and offer tax breaks.
Pros: no restrictions on how funds are used
Cons: parents have less control over how funds are used
An educational trust is another option for you if you are trying to save for your child’s education. A trust is for an individual to hold assets on behalf of another person with the intention of eventually handing them over.
Pros: gives control on how funds are used
Cons: reported as assets and may affect financial aid package
Another college savings choice is a treasury bond issued by the U.S. government, called an IOU. This is an agreement that one person loans money to another in exchange for the original deposit, plus interest when the bond matures.
Pros: low risk
Cons: yields are low
How Much To Save
Calculating the amount of money your child will need is complicated. Some recommend that you look at current projections of cost and divide that by the number of months until your child will attend. This will produce a number to strive to put away. According to Sallie Mae, the average family will save about $2,500 in investment accounts and about $3,000 in savings accounts. 529 plans hold an average of about $5,500 saved.
Having some plan in place now to save for your child’s education is a wise action to take to avoid large student loans later. Whether you choose only one option to save or a few, you will be well on your way. You and your child will appreciate that you put away some funds to help offset the cost of college.